Judge declares reforms to Electricity Industry Law unconstitutional

In ruling on amparo lawsuit 250/2021 filed by the Centro Mexicano de Derecho Ambiental, A.C. (the Complainant), the Second District Judge in Administrative Matters Specializing in Antitrust, Broadcasting and Telecommunications (the Judge) declared unconstitutional certain provisions of the Decree amending Mexico’s Electricity Industry Law (the Challenged Reform),[1] for violating the human right to a healthy environment.

This article examines the Judge’s decision and its implications for individuals, businesses and investors in Mexico’s electricity sector.

The ruling

In his July 21, 2022 ruling, Judge Juan Pablo Gómez Fierro highlighted the vanguard 2013 constitutional reform which modernized the energy landscape and established two fundamental principles: (i) more efficient energy, at a competitive, lower price, and (ii) cleaner energy sources with a lighter environmental footprint for the benefit of users.  The 2013 reform resulted in a new model of organization within the electricity sector: greater participation from private companies to achieve more efficient and competitive development of the sector and increased use of clean energy to better protect the environment.

The Judge determined that, since its entry into force, the Challenged Reform modified the core principles of the 2013 energy policy by favoring the Federal Electricity Commission (Comisión Federal de Electricidad or CFE), over other competitors, and privileging the use of more pollutant energy sources, by limiting the operation of clean energy projects.

Furthermore, the Judge found that the Challenged Reform bears negative implications for free competition and participation as well as for the right to a healthy environment. Below is a more detailed analysis of the Judge’s findings:

First, the Judge declared unconstitutional the new rules that prioritize the primarily fuel-based energy generated by CFE, over renewable energy and the new electricity hedge agreements that include a commitment to the physical delivery of energy (contratos de cobertura eléctrica con compromiso de entrega física de energía).

The Judge chose to address the issue of the Challenged Reform as it establishes rules that give priority to CFE generation plants which, for the most part, operate from conventional energy sources and harm private power plants that operate through renewable energy.

In the Judge's opinion, this is contrary to the constitutional mandate to ensure the protection of the environment, incorporate best practices in the efficient use of energy and natural resources, reduce the generation of greenhouse gases and compounds, decrease the generation of waste and emissions, and lower the carbon footprint in all processes.

Second, the Judge declared unconstitutional the new scheme for granting clean energy certificates (certificados de energías limpias or CELs). In accordance with the Challenged Reform, CELs are granted regardless of the ownership or commercial operations commencement date of the power plants, thereby, benefiting CFE hydroelectric plants.

The original purpose of the CELs was to encourage the development of new energy generation projects through clean sources in order to increase the nation’s overall generation capacity. By abandoning the original scheme, all power plants that generate electricity through clean sources could receive CELs, including those that operated before the Challenged Reform’s entry into force.

Accordingly, it is likely that under the new scheme the number of CELs will multiply, without achieving the intended effect of generating more clean energy – which provides an exclusive advantage to CFE generation plants that, even without additional investments, would receive a greater number of CELs.

Another risk is that CFE could transfer those CELs to the Basic Services Supplier (Suministrador de Servicios Básicos), a subsidiary of CFE, to the detriment of other suppliers that are obligated to comply with the CEL requirements. The Judge specifically noted that the Federal Antitrust Commission (Comisión Federal de Competencia Económica or COFECE) highlighted this issue in its opinion OPN-001-2021.

Third, the Judge declared as unconstitutional any attempt to eliminate the Basic Services Supplier’s obligation to purchase energy through auctions. As it is now optional to enter into contracts through auctions, the Basic Services Supplier, through legacy contracts, could purchase energy from CFE’s own power plants, without CFE power plants having to compete with other generators.

In other words, this amendment legally eliminates the regulatory scheme that previously required successive auctions to be held in order to promote the offering of electricity and associated products under conditions of effective competition with the country’s current supplier.

Based on the foregoing, the Judge concluded that the Challenged Reform displaces the commercial operation of power plants that operate with cleaner and less expensive energy sources.  According to the Judge, this will have the effect of limiting the dispatch by clean energy power plants and preventing them from offering their energy, irrespective of whether the energy is generated from renewable sources.

Moreover, the Judge concluded that this scheme would place the supply of electricity from conventional power plants in a privileged position.  Conventional power plants are more expensive to operate and are run mostly using fossil fuels that generate the types of emissions that Mexico has committed to reducing through various international treaties.

To avoid creating a regulatory vacuum, the Judge ordered the authorities to continue applying the regime set forth in the Electricity Industry Law (Ley de la Industria Eléctrica orLIE), which was in force prior to the Challenged Reform.  Likewise, he determined that the amparo constitutional protection granted to the Complainant may benefit other persons even if they have not resorted to that constitutional remedy.

Takeaways

The Judge’s ruling in amparo 250/2021 is a critical development in the sector as it is among the first to declare the Challenged Reform unconstitutional.  The ruling becomes more relevant considering that, on April 7, 2022, the Mexican Supreme Court (Suprema Corte de Justicia de la Nación or SCJN) dismissed the unconstitutionality action 64/2021 that sought to strike down the Challenged Reform.

It should be noted that the Judge’s ruling does not constitute res judicata, since the Mexican Congress and President – the defendants taken to court by the Complainant – may still promote the review of the judgment, which will be decided by the SCJN.

Finally, the amparo 250/2021 judgment is relevant to the consultations under the United States-Mexico-Canada Agreement (USMCA) initiated by the US and Canadian governments in light of the potential violation of the USMCA by the Mexican government’s energy policy. In an interview with Reforma newspaper, our partner Gabriela Alvarez explained the consultation process.

As a result of the measures taken since 2020 and those set forth in the Challenged Reform, foreign investors involved in energy projects in Mexico may wish to consider their rights and potential remedies under Mexican law, such as amparo protection, as well as under the applicable investment treaties and other international instruments, such as investor-state international arbitration.

Please see our series of articles on the potential for investment claims arising out of measures taken by the Mexican government in connection with the energy sector:

• Mexican Energy Regulatory Commission imposes sanction of more than US$450 million; Mexico’s Supreme Court issues precedent disfavorable to permit holders (June 28, 2022)
• Mexican Congress rejects electricity constitutional reform and approves bill to regulate lithium (April 20, 2022)
• Mexican Supreme Court dismisses Unconstitutionality Action against Electricity Industry Law reform (April 8, 2022)
• New developments in the Mexican energy sector generate uncertainty (November 17, 2021)
• President of Mexico files constitutional reform bill on electricity (October 7, 2021)
• Reforms in the energy legal framework in Mexico and challenge mechanisms (June 4, 2021)
• Mexico’s Hydrocarbons Law Reform Bill: A controversial new measure in the Mexican energy sector (April 8, 2021)
• Reform to the Electric Industry Law: a new risk for energy projects in Mexico (March 10, 2021)
• New measures threaten investments in the Mexican energy sector (July 14, 2020)
• Mexican renewable energy projects affected by new measures (May 19, 2020)

If you have any questions about these measures and their implications, please contact any of the authors.

[1] Published in the Official Gazette on March 9, 2021. In our publication of March 10, 2021, we analyzed the content of the Challenged Reform.